INSIGHT: No More Distress for Commercial Landlords?

Posted on October 22, 2014

In a recent seminar held jointly between Pearson Solicitors and Chartered Surveyors, Breakey & Nuttall, Commercial Leases, CRAR and Top Tips for Landlords were just some of the topics covered by the speakers --- here is a brief synopsis of what our legal team had to say...

Chris Burke explains how new laws are affecting landlords……

Commercial Rent Arrears Recovery, known as CRAR, was introduced by statute in April 2014 in place of the ancient remedy of distress that had proven popular with commercial landlords as a quick and cost effective method of recovering rent arrears from defaulting tenants without recourse to the courts or forfeiture of the lease. It is however less about pro-active bailiffs and more about notices being given to tenants.

Landlords should note that you still do have other options available to you to recover rent arrears such as:-

1. Forfeiture of the lease
2. Court proceedings
3. Insolvency eg statutory demand
4. Enforcing your security by way of rent deposit or guarantees.

The remedy of distress was an ancient remedy introduced in law in 1278 at a time when most tenants were agricultural and paid rent in arrears once their crops had been harvested. It was logical for landlords to take immediate action against tenants if they did not pay the rent whereby they could go onto the land and take the crop in satisfaction of the liability without forfeiting the lease. However, in more modern times, the self help remedy was criticised by the courts as being too draconian and with the introduction of the Human Rights Act 1998 it was only a matter of time before the law was abolished. Bailiffs’ practices were often criticised as being aggressive and intimidatory but commercial landlords liked the ease and cost effectiveness of distraining for rent.

By way of an example, I was instructed by a commercial landlord a couple of years ago in relation to retail premises in Manchester City Centre. Arrears had grown up to over £20,000.00 as the shop hit the Christmas period. The rumour was that the shop was going to go into administration after the Christmas rush and so we arranged at short notice for the bailiffs to be instructed to distrain for rent. A number of bailiffs turned up with vans, started taking stock from the shop whilst in the middle of the trading day and within a couple of hours the £20,000.00 had been paid. Soon after the Christmas break the company went into administration.

What do you do if you have a situation where you wish to recover rent but don’t wish to forfeit the lease, or issue Court proceedings by way of CRAR?

Under the new rules only a certified Enforcement Agent (a bailiff) can exercise this remedy. There is no prescribed format. The form filling is very straight forward. The landlord simply needs to complete prescribed content such as name and address of the tenant, arrears etc and send that information to the certified Enforcement Agent.

The leases to which the remedy of CRAR can be applied has changed slightly. Landlords can still exercise CRAR against legal or equitable leases, fixed term leases, tenancies at will or periodic tenancies. They still cannot use the CRAR remedy for a tenancy at sufferance where the tenant remains in occupation after the lease expires but the landlord has not confirmed the tenant can remain, or in licences to occupy. There needs to be a landlord and tenant relationship.

Whereas under the old procedure distress for rent could be exercised even if there was no lease in writing. Now CRAR can only be exercised if the tenancy is evidenced in writing. Ideally, this would be by way of a lease but if not, a rent book would probably be sufficient. Whether rent demands or evidence of payment would suffice is probably more of a grey area. Also under the old rules if a tenancy had come to an end, distress could not be exercised, whereas under CRAR it is possible to take action against the debtors goods even after the tenant’s lease has ended unless it has been ended by way of forfeiture.

Another difference is in relation to ‘whose goods’ can be taken. Under distress a sub tenant and third party’s goods could be taken subject to certain protection whereas under CRAR only a tenant’s goods can be enforced against. This could have an obvious effect on goods that are subject to HP or leased. They cannot be taken.

The rules that relate to what goods are exempt now include an exemption of items in use if there is a risk of a breach of the peace. Again, landlords may consider this as being a step too far in the protection of the tenant. Seemingly all the tenant had to do is kick off when bailiffs attend to attempt to take items in use and then rely upon there being a risk of a breach of the peace to defeat the landlord’s claim under the CRAR procedure.

One change benefiting the landlord is the new rules introduced by CRAR relating to goods on the highway. Often under the old rules Bailiffs would report back to landlords to say that the tenant had insufficient goods on the premises even though there might be a brand new Range Rover outside. Under the new rules landlords are entitled to take goods on the highway (not private car parks) that belong to the tenant unless there are animals or livestock in the vehicle. Therefore you could have the farcical situation of a tenant putting his dog in the car in order to prevent the Enforcement Agent from taking the car in question. Further, if the car belongs to a Director then the goods could not be taken however, this rule will probably helpful where vehicles may be owned by the tenants company for example for delivery vans. However, in theory, this is a potential win for landlords under the new CRAR regime.

Time Limits For CRAR

The minimum amount required to exercise CRAR is 7 days rent.

On the issue of notice it is 7 clear days notice that has to be given by the Enforcement Agent to the tenant of the landlord’s intention to enforce against the tenant’s goods. This is the major difference as compared to the law of distress where no notice whatsoever was required.

This is also one of the biggest areas of criticism that causes doubt as to how effective CRAR will be. In my view it gives the tenant time to evade enforcement.

In certain circumstances if the landlord became aware that the tenant was in the process of attempting to evade enforcement by disposing of goods the landlord can also apply to the Magistrates Court to give shorter notice.

How effective these deterrents will be is debateable. There is an obvious practical difficulty in that under the law of distress, the landlord knew what was on the premises because of its immediate impact and the element of surprise.

WHAT PREMISES – DOES CRAR APPLY TO:-

The premises must be purely commercial, no part can be occupied or let for residential purposes. Accordingly, this means that it depends on the terms of the lease as to whether CRAR will apply or not. For example in relation to shop and flat premises it is important that such leases are properly drawn up. If the lease does not refer to a flat to be used as a dwelling and is actually used for business eg the stock room then CRAR can be used. However, if the lease refers to the flat being used for residential purposes only then CRAR will not be available.

WHAT SUMS ARE RECOVERABLE?

CRAR can only be used to recover rent but rent is more clearly defined so it only includes use and occupation and specifically excludes rates, insurance and utilities (although of course a landlord could still recover those debts by other methods).

In Summary

There are restrictions on the amount a landlord can recover, there are restrictions on the premises to which the CRAR rules apply and most importantly the fact that notice has to be given to the tenant that this is the action you intend to take.

It is still early days and there are no real records as to how many commercial landlords are using CRAR. In my experience in litigation, the majority of tenants do still tend to pay up if they can upon receipt of a letter before action or notice.

For advice on all areas of commercial litigation contact Christopher.burke@pearsonlegal.co.uk

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.